Income tax on survivor spouse

...and assuming that the income from the rental property came from the survivor's trust? What type of trust is that?

Something is being taxed at trust rates, rather than individual rates after a pass-through? You've made it clear we're only talking income tax here...

Sorry, all I'm offering is more questions instead of answers. But to answer the last question, Q: what can be done? -- A: don't compare taxes from a set of returns where the properties are backwards!

-Mark Bole

Like a typical survivor's trust it's a revocable, grantor trust. She is directly taxed on all the income from it.

She's also taxed on the income from the decedent's trust, because she receives it. But the tax preparer tells me that if that income is attributed to the irrevocable trust and counted as a distribution to her, the tax is much lower.

It should all be pass-through. And the surprising thing is that I am told that the tax is higher if it doesn't go through the trust, and lower if it does.

The thing is that the income is exactly the same, it all goes to her and gets taxed to her. So I don't understand why there's be such a big difference.

Stu

You can see from 1041 instructions that trust rates are far higher than individual rates. I can't imagine how there would be a situation with more than a trivial amount of money that would have a different result. Joe

That's what I figured, too.

By the way, I don't think the trust tax rates should have anything to do with it, because all income would be treated as distributed, so fully deductible to the trust and includible in the income of the surviving spouse.

Stu

Well, the income comes through a K-1 which then gets taxed as if the recipient had their own dividends, cap gain etc. I agree with you there.

Funny thing is this, we're not just discussing a point of fact (that the recipient's tax should be lower than the trust paying the tax, and that it's a pass through, same as if recipient received directly), we are trying to guess what mistakes the tax preparer made. That's a bit tougher, no?

Joe

Agree. Barring further information, my answer is that the difference in taxation is a SNAFU by the preparer.

-HW "Skip" Weldon Columbia, SC

I was afraid you'd say that. I guess I just need to look at the actual returns and see if I can figure it out.

Thanks.

Stu

I'd look at the sale of the home and any capital gains associated with it.

Look at whether both sets of calculations treated any step up in value or "home owner's capital gain exemption" the same way.

If you place the two sets of returns side by side it should become obvious (but then again this is income tax and nothing is obvious)

The capital gain would have been minimal at best, since, as community property, the entire property got a stepped up basis on the husband's death. But if there had been a large capital gain, it seems to me the tax problem would have been the other way, because the surviving spouse would have gotten the $250,000 exclusion while the trust wouldn't.

Thanks. While I do a lot of work regarding taxes, I don't do returns, so I can't say it would be obvious to me, but I suppose that's the only thing I can do.

Stu